Its announcement marks a fundamental change in how the ECB sees its role in bond markets. It has made clear that it sees managing spreads as part of its responsibility
Save time by listening to our audio articles as you multitaskAs the yield on Italy’s ten-year sovereign bonds surpassed 4%, the central bank called an emergency meeting on June 15th. Its governing council tasked the staff with coming up with an “anti-fragmentation” tool, a government-bond-buying scheme that would help prop up sovereigns in distress. The announcement marks a fundamental change in how theBeing a central banker in a monetary union is hard.
Differences in liquidity and the extent to which a government’s bonds are seen as benchmark assets matter, too. In a recently published paper, Hanno Lustig of Stanford University and colleagues estimate that this “convenience yield”, the yield that investors are willing to forgo for safety and liquidity, explained more than half the variation in spreads between euro countries from 2008 to 2020.
In times of stress—as when the pandemic struck in March 2020—investors seeking safety drive up the spread between, say, Italian and German bonds . These spreads between government bonds then translate into differing borrowing costs for firms and households. Despite sharing a currency , borrowers in Tyrol, Austria, and South Tyrol in Italy could face quite different interest rates, because their respective national governments are charged different rates by investors.
The question is what counts as “disorderly”. Shortly before the emergency meeting, Italian ten-year spreads on bunds rose to 2.4 percentage points. Not everyone agrees that was a problem. Volker Wieland, a former member of the German council of economic experts, argues that Italy’s debt is not unsustainable and that spreads did not warrant action by thealready has the means to contain panicky rises in spreads.
Unless the euro zone comes closer to being a federal entity, with a common finance ministry and shared taxes and benefits, spreads will be a fact of life. Further banking or fiscal integration could help narrow them without central-bank action. But progress on those cannot be counted upon. With its announcement, the
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